Jan 6, 2009

Business - India,China demand fuels investment boom in Scotch Whisky

David Kiley

The Easter Elchies House, a Jacobean manor that's home to the Macallan Distillery, offers panoramic vistas of the hills and heaths of the Scottish Highlands. But lately the view has become a wee bit less idyllic. Behind the manor, four steel and concrete buildings are going up, an $80 million project that includes three vast warehouses that will hold more than 100,000 barrels of whisky. "We can't meet demand the way we are going, especially in India and China," says distillery manager Alexander Tweedie.

Just a few years ago such an investment would have been almost unthinkable. Two dozen Scottish distilleries were shuttered in the 1980s, '90s, and earlier this decade. Too few tipplers bought Scotch as the young and the hip quaffed wine, beer, or other spirits. Scotch production fell from 415 million liters in 1980 to just 268 million the next year. Production climbed back to 429 million by 1990 but stayed at about that level until 2006 despite growing exports.

RECESSION-PROOF?

These days, Scotch—especially single malt—is hot again. Sales in 2007 rose by 75% in China, 36% in India, 27% in Europe, and 6% in North America. Despite the global slowdown, few expect Scotch sales to fall dramatically—though more people are drinking at home rather than in bars.

That's fueling an investment boom in Scotland. Pernod Ricard's Glenlivet is doubling production. Moët Hennessy's Glenmorangie plans a 50% boost. Diageo (DEO) is spending $200 million on what will be Scotland's biggest malt distillery, in Roseisle. In all, some $800 million is scheduled to be spent between 2007 and 2010, adding about 50 million liters in total annual capacity. "This is a sea change in Scotland," says Gavin Hewitt, chief of the Scotch Whisky Assn., a trade group.

The problem is, whisky typically needs to spend a decade or two in oak barrels before it can fetch premium prices. Because of dwindling stocks from the 1990s slowdown, some distilleries are running low. "Everyone has supply issues, especially [for] whisky aged more than 12 years," says Nick Morgan, global malts director at Diageo, which makes Oban, Cardhu, and Talisker.

Until the new investments yield more spirits, distilleries are creatively marketing younger whiskies. Glenmorangie has long crafted whiskies "finished" for two years in Sherry and Madeira casks after a decade in American oak (considered the minimum for single-malt), fetching prices similar to Scotch kept years longer. Last fall the distillery launched a $185 bottle, "Signet," that includes young whiskies and doesn't say how long it has been aged. "The industry backed itself into a bit of a corner with age statements," says Alistair Longwell, distillery manager at Ardmore, which two years ago introduced a "Traditional Cask" offering that doesn't claim any particular aging.

Moët Hennessy's Ardbeg has perhaps been the cleverest. The distillery shut down in 1981 and reopened in 1997. To generate cash while it waited for its new whisky to age, it began selling six-year-old tipple as "Very Young," eight-year-old as "Still Young," and nine-year-old as "Almost There." These peaty offerings became a cult hit, and now sell for $350 to $400 per bottle—far more than the distillery's 10-year-old blend. "Age may communicate status," says Bill Lumsden, master distiller at Ardbeg and Glenmorangie. "But it doesn't always translate to the best flavor."